Gulf is betting big on consolidation

Recent moves in region’s banking sector offer more than a glimpse into what’s likely

GCC economies were moving towards more sustainable ways well before the Covid-19 pandemic struck. This was caused by the 2016 oil price crash, an event that left a great impact on the region’s economy and relatively similar to what we are witnessing today.

The markets took into consideration all possible outcomes at the time, and governments made tough precautionary measures along with coming up with a transformational plan towards creating more crisistolerant economies. This reshaped the business environment over the past five years.

Large businesses merged to form stronger entities; new government legislations to improve the business environment were introduced; and incentives were brought for foreign investors who could offer added value to the economy. Without all of that progress, we would have seen more devastating outcomes from this pandemic.

The financial sector recorded a succession of mergers, starting with First Abu Dhabi Bank, formed from the coming together of National Bank of Abu Dhabi and First Gulf Bank and creating the region’s second largest financial institution. The merger was approved on December 7, 2016, and FAB shares started trading on April 2, 2017. The third largest financial institution is also based in the UAE, and was a result of a merger between National Bank of Dubai (NBD), established on June 19, 1963, with Emirates Bank International. On March 6, 2007, Emirates NBD was formed and the shares were listed on October 16, 2007.

These two mergers collectively generated Dh27 billion as profits during 2019, with an average increase of 24 per cent over 2018. They employ more than 19,000 and managed Dh1.50 trillion worth of assets by the end of 2019.

Regional push

Having benefited locally from the mergers, they now plan to expand in the region. FAB is executing an acquisition of Audi Bank in Egypt, while Emirates NBD has successfully acquired Deniz Bank in Turkey and has gained approval to expand in Saudi Arabia by opening 20 branches. Emirates NBD has become the highest valued banking brand in the UAE, at $4.13 billion.

These consolidations have encouraged other regional banks to consider similar moves, with Kuwait Finance House (KFH) gaining central bank approval to merge with Ahli United Bank (AUB) of Bahrain for the largest cross-border merger deal in the GCC. It is expected to be finalised by December as the board of KFH delayed the process due to the pandemic.

The merger will form the largest Islamic bank in the world with assets of $101 billion). The governments of Kuwait and Bahrain are expected to benefit as the new venture will have a greater lending capacity and reduced operating costs will generate higher profits for both shareholders. In turn, this will provide greater financial capacities for both economies.

In Saudi Arabia, the National Commercial Bank (NCB), the kingdom’s largest financial institution, announced a framework agreement on June 25 to merge with Samba Group, the fifth largest bank in the kingdom. The latter itself is a result of an earlier merger between Citibank’s operations in the kingdom and United Saudi Bank in 1999.

The coming together of NCB and Samba to form a new regional powerhouse is built on Dh203 billion in assets. On a smaller scale, Boubyan Bank of Kuwait, backed by National Bank of Kuwait Group, recently completed the buy of UK’s Bank of London and the Middle East (BLME). Boubyan Bank generated 62.7 million Kuwaiti dinars of profits in 2019. This acquisition of a major share in BLME marks a new expansion for Kuwait’s fast growing Islamic bank. The acquisition executed in February aims to serve investor appetite in Kuwait for the UK’s investment options and diversify the bank’s revenue stream to provide a stronger balance sheet.

It is clear the GCC economies will grow more resilient and develop further. Its establishments will grow to be multibillion dollar entities with international reach, tap new markets, and acquire competitors abroad by expanding their flagship brands.